Initial public offerings by private equity-backed companies in the UK and Germany outperformed the stock market and other IPOs, according to two academic studies.
The findings contradict the dim view investors have of shares sold by leveraged buy-out companies, after the poor performance of some high-profile IPOs, such as Debenhams, the department store chain, and camera retailer Jessops.
It is unclear whether the performance of private equity-backed IPOs reflects better management by buyout firms or a tendency for only the most successful buyouts to end in a flotation.
Investors buying an equal share in every IPO of a private equity-backed company since 1990 and selling after 36 months would have achieved 3.3 times the FT All-Share index, according to a UK study backed by Citigroup.
Christian von Drathen and Flaviano Faleiro at London Business School who wrote the two studies, said: “Criticism of LBO-backed IPOs is largely unwarranted”. The report was commissioned by Terra Firma, the buyout firm.
Private equity-backed IPOs produced average annual returns of 18.4 per cent in the first three years compared with 11.9 per cent for other IPOs, the report says. It compared 128 IPOs of leveraged buyout companies that listed in the UK between 1990 and 2006 with 1,121 non-LBO IPOs.
A German study, sponsored by Deutsche Bank and covering 138 private equity-backed IPOs, found these produced an average 12.1 per cent, more than three times the CDAX index.
Private equity-backed IPOs that have underperformed include Peacock Group and New Look, the retailers.
But there are at least as many successful private equity-backed IPOs, such as William Hill bookmakers, Punch Taverns and Yell Group. Shares in Southern Cross Healthcare more than doubled after its float.
Three factors made an IPO of a private equity-backed company more likely to outperform: the size of stake retained by the private equity owners; the amount of assets they have under management; and the time between buyout and flotation. The amount of debt owed by a company and the size of management’s stake made little difference.
The authors said their findings raised the question whether buyout firms could “demand higher exit valuations and improve …investment performance” because of their superior IPO record.
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